Court allows appeal partially, permits interest payment, loss on currency fluctuation.

The High Court allowed the appeal partially, setting aside the Tribunal's decision to disallow interest payment and loss due to currency fluctuation. The Court emphasized that interest paid on borrowed funds advanced to a sister concern for commercial expediency cannot be disallowed. It also stated that the loss on currency fluctuation should be allowed when making the balance sheet. The issues were remanded for fresh consideration in accordance with the law.

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Issues:
1. Disallowance of interest payment due to interest-free advances made to sister concern.
2. Disallowance of actual loss incurred due to fluctuation in currency rates.

Analysis:

Issue 1: Disallowance of Interest Payment
- The appellant claimed interest expenditure on pre-shipment credit but diverted funds to its sister concern, leading to disallowance by the Assessing Officer.
- The Commissioner of Income Tax (Appeals) upheld the disallowance partially, relying on precedents stating interest on borrowed capital advanced to a sister concern is not a permissible expenditure.
- The Tribunal affirmed the disallowance, prompting the appellant to appeal.
- The High Court noted the appellant had its own funds to make advances, but authorities found the funds were borrowed, leading to disallowance.
- Referring to the Apex Court's decision in S.A. Builders Ltd., the Court emphasized that interest paid on borrowed funds cannot be disallowed if advanced to a sister concern for commercial expediency.
- The Court found the Tribunal failed to consider how the borrowed funds were utilized by the sister concern, thus setting aside the disallowance and remanding the issue for fresh consideration.

Issue 2: Disallowance of Loss due to Currency Fluctuation
- The appellant claimed a loss on foreign exchange fluctuation, but the Assessing Officer disallowed a portion of the claimed amount.
- The Commissioner upheld the disallowance, stating that the loss should only be allowed when the goods are supplied against the advances received.
- The Tribunal affirmed the disallowance, leading to the current appeal.
- The High Court referenced the Apex Court's decision in Commissioner of Income Tax v. Woodward Governor India P. Ltd., stating that the revenue loss on currency fluctuation should be allowed when making the balance sheet.
- Consequently, the Court set aside the Tribunal's decision and remanded the issue for determining the quantum of loss to be allowed under Section 37 of the Income Tax Act.

In conclusion, the High Court partially allowed the appeal, quashing the Tribunal's order and remanding both issues for fresh consideration in accordance with the law.

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